MA GROUP ASSIGNMENT

Question 01:Briefly outline the concept of discounted cash flow

analysis
ANSWER:
discounted cash flow (DCF) analysis is a method of valuing a project, company, or asset using the
concepts of the time value of money. All future cash flows are estimated and discounted by using cost
of capital to give their present values (PVs).Used in calculating Net Present Value(NPV).
QUESTION 02:List and explain briefly the advantages that the net
present value method has over the internal rate of return method.
IRR uses one discount rate, But discount rates usually change over time. IRR does not account for
changes, making it a poor option for longer-term projects with varying discount rates.

IRR calculations are also ineffective for projects with a mix of positive and negative cash flows.

Using NPV also works better when a project’s discount rate is not known

The purpose of calculation of NPV is to determine the surplus from the project, whereas IRR represents
the state of no profit no loss.

When the amount of initial investment is high, the NPV will always show large cash inflows while IRR
will represent the profitability of the project irrespective of the initial invest. So, the IRR will show
better results.
Description Year 0 Year 01 Year 02 Year 03 Year 04 Year 05
Initial investment (800000)
Cash inflow 250000 250000 250000 250000 250000
Cash outflow (75000) (80000) (88000) (94000) (105000)
Depreciation (120000) (96000) (76800) (61440) (49152)
Disposal profit 53392
PROFIT BEFORE TAX 55000 74000 135200 194560 299240
Tax(35%) 19250 25900 47320 68096 104734
Profit after tax 35750 48100 87880 126464 194506

depreciation 120000 96000 76800 61440 49152

Disposal value 2500000
Working cap (40000) (10000) 50000
(640000) 155750 134100 164680 187904 543658
Discount factor 1 0.870 0.756 0.658 0.572 0.497
Present value (640000) 135502.5 101379.6 108359.44 107481.09 270198.03
NPV=(135502.5+101379.6+108359.44+107481.09+270198.03)-640000
=82920.66 POSITIVE NPV
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THANK YOU